Pressure's On PS3 Price Tag

As always, the monthly hardware sales are closely watched for indications of the health of each platform. For the three big consoles – the Xbox 360, the PlayStation 3, and the Nintendo Wii – sales were down from last month, but generally higher than in 2007.



We'll start with the Xbox 360, whose sales were down both month-on-month and year-on-year. In August 2007 Microsoft announced its first Xbox 360 price cut, which makes the year-on-year comparison unfair. However, since February of this year the Xbox 360 has struggled to stay above 50,000 units per week, and as a result its nemesis, the PlayStation 3, has caught up by a quarter million units year to date.

So it is understandable that Microsoft cut its system prices as of the beginning of September. The entry-level Arcade unit is now $200 while the Core system retails for $300 and the Elite for $400. This range of pricing puts the low-end model $50 under the price of the Nintendo Wii and the top model at the minimum price for a PlayStation 3. According to Microsoft's own data, Xbox 360 sales doubled in the first week that consumers could take advantage of the lower prices. Using August sales as a guide, the Xbox 360 could sell between 400,000 and 500,000 systems in September, provided that it maintains the momentum from the first week of sales. Should sales slow appreciably after an initial burst of interest, sales may be between 350,000 and 400,000.

Microsoft's strategy on pricing has seemed too cautious. In 2007, Microsoft's Aaron Greenberg bragged that the Xbox 360 had maintained its launch price for 21 months, longer than any previous console. Such bravado seems ill-chosen, given that during that time Nintendo ramped up its production and Sony began cutting costs and dropping PS3 prices. By the beginning of 2008 the PlayStation 3 was besting the Xbox 360 in monthly sales and the Wii was well on its way to surpassing Microsoft's installed hardware base.

Regardless, here's the really good news for Microsoft. According to the NPD Group, the Xbox 360's launch-to-date average sale price (ASP) is just over $376. During August 2008, we estimate it was in the $330 to $340 range. This means that the $80 and $50 price cuts to the Xbox 360 systems could push the system's ASP below $300 for the first time, and that could be extremely damaging to Sony. (Whether it would make the Xbox 360 appealing to potential Wii consumers is unclear. There is evidence that the Wii is a force unto itself.) The PS3 retails for $400 or more, and we estimate that the PS3's minimum ASP was around $420 in August. As the gap between the Xbox 360 and PS3 grows, the pressure on Sony to drop prices could become enormous.

In the past Sony has favored adding value (e.g. adding a pack-in game) over actual price reductions. While this might work in times of plenty, it has become harder in the past year for Americans to justify a $400 videogame system. Simply put, if a consumer can't afford a $400 PlayStation 3, he still can't afford it after Sony crams an overstock copy of Uncharted into the box.

Moreover, the PlayStation 3 is not the same Blu-ray trojan horse that it was in 2006. There are now Blu-ray players under $250, and surely more to come in the near future. And even if PS3 sales were doubled by consumers buying it as a Blu-ray player, those are not consumers necessarily predisposed to buying games for the system.

Sony is in the unenviable position of having to choose between market share and profitability. We already know that Sony's HD console lost to Microsoft's in August and will lose again in September. Moreover Sony's executives have said time and again that a price cut is not on the table in 2008. Whatever Sony chooses to do, it will probably be painful to watch.

Nintendo, on the other hand, continues to enjoy the most robust console and handheld sales the industry has ever seen. The top-selling system in August was the Nintendo DS, while the Nintendo Wii came in a very strong second. Nintendo's motion-sensing console and double-screen handheld are each selling at twice the rate of their closest competitors.

That said, Nintendo Wii sales were down for the month, and that deserves some mention. We believe that last year Nintendo throttled the Nintendo Wii supply through August and September to prepare for the holiday rush starting in October. Even with that preparation, the Nintendo Wii was impossible to find by the first week of December 2007. The lower Wii sales in August 2008 may be evidence that Nintendo is expecting shortages again this year, despite its higher production capability.

The pricing of the Wii also deserves a comment. The passing of this week will mark the end of the 22nd month that the Wii has cost $250 in the United States, besting Microsoft's record from a year ago. Moreover, Nintendo will probably have no need to reduce the Wii's price for at least another six months. It is quite possible that the Wii will reach 30 months on the market before Nintendo lowers the system's price. (In jest we would suggest that Nintendo attempt to stave off shortages this holiday season by raising the system's price to $300.)